As the economic expansion ages and macroeconomic fundamentals begin to deteriorate, one sector that is likely to find the going tough is the consumer discretionary sector. This year presents a complicated backdrop for restaurant investing, according to Morgan Stanley said.

The Analyst

Analyst John Glass named Mcdonald's Corp (NYSE: MCD), Restaurant Brands International Inc (NYSE: QSR) and Chipotle Mexican Grill, Inc. (NYSE: CMG) as his top ideas in the space.

Morgan Stanley's ratings and price targets for restaurant stocks in its coverage universe are as follows:

The Thesis

Prospects of moderating economic growth, lapping benefits from tax reform and the market's reframing of restaurants in the context of a later cycle makes 2019 a more challenging year for restaurant stocks, Glass said in a Thursday note.

Even amid the tough climate, fast food presents a compelling investment opportunity relative to casual dining peers due to less cyclical risk and P&L insulation from labor inflation, the analyst said.

Restaurant valuations compress in the later part of an economic cycle by 0.2 to 0.3 times relative to the market, Glass said — yet the compression could be offset by an expected market multiple expansion, he said.

"All franchised" restaurants, which rely mostly on domestic unit expansion, will the see the biggest multiple compression if franchisee growth slows due to higher capital costs, wage inflation and discounting, Glass said.

After a strong 2018, the analyst said casual diners could decelerate in 2019 amid a decline in quality or taste scores and labor cost headwinds.

McDonald's Shares Attractive

Morgan Stanley expects McDonald's U.S. sales to outpace peers in 2019, as the benefits of the re-imagining plans become more visible and improvements are made to value and localized ads.

"Rising ROIC to new highs combined with falling capex post '20 add to appeal, while proven defensiveness (both fundamentals and stock performance) make shares attractive in current environment," the firm said.

Restaurant Brands Valuation, Growth Out-Of-Sync

Restaurant Brands has the most dislocated valuation versus growth in the firm's franchised coverage universe, Glass said. Improving margins at Tim's, better visibility on international expansion and economics and increased investor outreach will help broaden its shareholder base, he said.

2019 Critical For Chipotle

Chipotle is a winner due to it being in the early stage of a turnaround, with new management and plenty of top-line opportunities, Glass said. Despite the company-owned model bringing wage pressures, the analyst said he expects areas such as purchasing and labor scheduling to serve as mitigating factors.

"'19 will prove a critical year to assess the success of the initiatives/opportunities first laid out in early '18."